Don’t ever use your credit cards for this

Like most people, I use my credit cards all the time. I buy groceries, gas, etc. If I can use my credit card to buy something, I do. But I would never, ever use my credit card to invest in the stock market!

Take on debt to invest?!

Use your credit card to invest in the stock market?! Sounds like a bizarre idea to me, but that’s exactly what my credit card company recommended that I do. Earlier this week, I was speaking to a representative from one of my credit cards. He was asking why I don’t use his company’s credit card all that often. I explained to him that the cash back offer on his company’s card was inferior to my other credit cards; his card only provides 1% cash back on most purchases; the cards that I mainly use offer 1.5% and 2% cash back.

Cash Back Credit Cards Directly to Brokerage Account

I indicated that the 2% card was especially advantageous as it automatically deposits funds directly into your brokerage account. The rep indicated that his company’s credit card allows you to deposit money directly into your brokerage account as well. I was intrigued and asked him to elaborate. He suggested that I could use my available credit limit; he suggested that I could take out a few thousand dollars as cash and deposit the money directly into my brokerage account!

source: Frankieleon via Flickr

How preposterous?! This rep was suggesting that I borrow against my credit card and use the cash to invest in the stock market. Historically, the stock market returns about 8-10% and the credit card charges 15%. So such an investment would, on average, return a 5% loss after one year. What an insane suggestion. Sure, it would work out well for the credit card company; they’d collect the interest charges on my outstanding balance until I paid it off.

I have to believe that the rep was acting on his own; I can’t imagine that the credit card companies are suggesting this approach to all of their customers. Regardless, don’t ever do this; no matter how tempting and sure that stock tip that you get happens to be. Don’t ever use your credit cards as a source for cash to invest in the stock market.

Back around the turn of the century, during the dot com hysteria, people were using whatever cash they could get their hands on to invest in the stock market. It was not uncommon to hear about people taking cash out of their homes via Home Equity Lines of Credit (HELOCs) or refinancing their homes to get cash, and then take that cash and invest it in the stock market. Many of those people saw their investments dwindle and then they still needed to pay back their HELOC on top of their first mortgages.

Don’t Do This

Don’t use the equity in your home to invest in the stock market. Don’t use your credit card to invest in the stock market either. If you can help it, don’t ever take cash out from your credit cards; the interest rate is usually too high.

Do This Instead

If you can, pay off your credit card debt in full every month. Make a plan to invest 10-15% of your gross pay; invest in the stock market. If you aren’t going to closely monitor your investments, then you may want to simply invest your money in a small handful of index mutual funds, like the S&P 500 index fund.

Whatever you do, do not take a cash withdrawal from your credit card to invest in the stock market.